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Despite the Conservative party winning a majority in Thursday’s UK general election, Brexit is far from ‘done’. The majority certainly gives Prime Minister Johnson more options, but all this really means is that the likelihood of a no-deal Brexit has diminished. Some investors, it seems, are overlooking this.
The UK and EU still have to negotiate a withdrawal agreement, which has to be mutually approved by 31 January 2020. Once the withdrawal agreement is ratified, the 1-year transition period begins. This transition period can be extended once by two years, which means that the UK could still be under EU rules and regulations until December 2022.
We will enter 2020 then with uncertainty still hanging over the UK economy because an abrupt end to the transition period would be economically damaging, could limit the UK’s negotiating power in future trade talks, and would also draw time and money away from other domestic priorities.
As such, we expect the Bank of England to put interest rate cuts on hold for the time being. A stronger pound will limit inflation, giving the Bank more space to operate. For these reasons, we do not expect the BoE to change its current guidance until at least Q4 2020 when the transition period is either over or extended.
The lack of clarity about the shape of any future trade deal between the UK and EU means that uncertainty continues to be a threat for the UK economy.
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